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The Bank of Japan’s policy of yield curve control depends on soft global rates and low yields, and this centre will simply not hold. As inflation rises, yields will spike, and the result will be a plunge in the yen. Ultimately, the central bank will resort to QE-style measures, but not before USDJPY hits 150.

Wall Street will be closely falling all Fed developments over the summer. Photo: iStock

By John J HardyAs if we didn’t have enough evidence from prior Federal Reserve developments this week, the New York Fed’s William Dudley was out yesterday also indicating that a “summer” hike is highly likely, provided there are no negatives. "If the economy evolves as I expect it to [then it’s] reasonable to expect a tightening in the summer, the June-July timetable”.

He even specifically pointed to higher odds of a June move.

The Canadian dollar should be at the centre of traders’ attention over the next few trading days, as we have CPI and retail sales data up today and a Bank of Canada meeting next Wednesday. Rate spreads after this week’s Fed speakers suggest further upside potential, with the interesting 1.3300 area attracting next.

Could we risk a Canadian CPI miss today after the loonie strength peaked in April from its January lows? Oil has been somewhat less supportive of CAD lately due to the intense wildfires shutting down capacity and the fact that it will take a far more considerable recovery in prices to shift the needle for notable new capital expenditures in Canada’s oil fields and in particular, oil sands.

The Swiss franc is looking to close this week at its weakest level versus the euro since the January 2015 franc revaluation if it sticks above 1.1100. The drive is perhaps the Brexit relief effect for sterling and interesting in both EURCHF upside and GBPCHF upside, but with the USD recovery, USDCHF has ramped rapidly higher and could be staring down parity soon.

USDCAD rides rhetoric wave

USDCAD squirted all the way to 1.3150 on yesterday’s hawkish Fed rhetoric before easing lower into this morning.

Another surge higher will likely focus on the 1.3300/50 zone, where the 200-day moving average and next major Fibo retracement lie, with bulls in the driver’s seat as long as we are north of the recently broken 1.3000 area.

Can USDCAD stay north of 1.3000?

Source: SaxoTraderGO

The G-10 rundown

USD – continues to stand strong on the rising prospects for a Fed move. A key focus remains on risk appetite for trade selection, i.e. if risky assets can absorb the Fed hawkishness with less fear, the USD/risky pairs are less interesting and USDCHF, EURUSD and USDJPY more compelling, while an ugly risk off move engendered by the Fed’s renewed rate hike talk will see especially USD/EM in the spotlight, but also USD/commodity currencies.

EUR – some measure of relief on the euro perhaps over the Brexit story, as evidenced in EURCHF though the renewal of the ECB/Fed policy divergence story is the key driver and euro negative. The euro is likely a passive participant to the themes shaking the market. Next EURUSD support is down near 1.1100.

JPY – a key resistance point today for USDJPY is the Ichimoku cloud bottom just ahead of recent highs (110.25-ish). The next level higher is the flat-line resistance just ahead of 112.00 and then the falling Ichimoku cloud top.

GBP – the squeeze has been on lately on the theme of Brexit relief after a number of polls, both telephone and internet, seem to show a trending move in favour of the Remain vote. But rate expectations haven’t caught up to the degree that sentiment and the currency have, so the momentum could slow significantly for GBP upside unless we get specific UK data catalysts soon.

CHF – again, some relief on the Brexit story perhaps as the driver of the move above 1.1100 in EURCHF and interesting to see if that repricing continues higher, with even more focus on USDCHF if parity falls in the sessions ahead. GBPCHF a likely popular trade in recent days as well.

AUD – Any upside here is about simple consolidation/relief from oversold levels as AUDUSD has whiplash-inducing shift in relative rate expectations. If we get bogged down here within the recent range, there is some risk of trading back toward 0.7400 in AUDUSD, but the focus remains lower.

CAD – A key few days ahead for CAD as we look for this second consolidation wave in USDCAD to follow through higher as long as Canadian data doesn’t surprise to the upside. Perhaps greater risk of a negative CPI surprise from Canada today.

NZD – Kiwi stubbornly resilient as focus is elsewhere, generally looking to fade NZDUSD rallies and wondering where the next catalyst is to bring deserved negative attention on the currency.

SEK – EURSEK may be reaching the top of its potential unless we go full bore risk off here, with 9.35/30 the pivot zone.

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